Diversification And Acquisition Strategies In Business: Advantages And Disadvantages

Related Diversification Strategy

Discuss about the Qs-Strg Management Final Exam.

Modern organisations move towards expansion and development in business environment to meet with customer’s multiple requirements. For this, managers have to take several attempts to make loyal engagements with customers as well as stakeholders. Therefore many organisations adopted diversification strategies into their business for bringing influence to competitive equilibrium in an industry. Other reasons behind it may be because of raw material procurement and products distribution systems inside the organisation. Diversification strategy can also be defined as strategy which is used by companies to expand its market in a diversified manner to enhance sales and profits (Effatdoost, 2013).

The related diversification strategy is one of the business strategies in which organisations adds or expands its businesses in its existing line of product or market. This kind of strategy is used by those businesses in which tangible or intangible relationship is established among different business units. This diversity helps them to reciprocate information’s between managers and business units in effective manner as they are jointly related to similar business or company. Related diversification strategy brings advantages in firms by understanding the threats and opportunities in an industry jointly and thus are able to provide effective results. These kinds of strategies are generally utilised by those companies which have strong competitive advantage but lack attractiveness in front of stakeholders. But, related diversification might bring few disadvantages to the firms also like issue relating change management, handling of employees, integrating diversified cultures and recruitments (Santhanam). On the other hand, synergies like generation of more profits with joint effort have attracted many organisations to undertake related diversification. For example, a phone company expanding or adding its services and wireless products by making a purchase of another wireless company is related diversification as it will bring advantage to the existing company by diversifying its business in related product.

Unrelated diversification strategy is a business strategy undertaken by businesses when they add new products or services that are unrelated to present business. In this kind of diversification, the companies diversify in those areas that have little to no similarity to each other. In other words it can be said that unrelated diversification is a result of diversification among different kinds of industries. Such kind of diversification are undertaken by those managers who have realised unattractive nature in their operations and to enhance their capabilities and skills, managers follow unrelated diversification strategies (Voice Marketing Inc., 2017). For example, any car company may decide to add Bicycle Company to expand its portfolio. This diversification will add attractiveness in its business in unrelated diversified manner since there is no direct fit between a car and a Bicycle.

Advantages of Related Diversification

Acquisition strategy refers to that strategy in which one organisation acquires another one while the other one ceases to exist. In simple words, acquisition is a strategy in which one business purchases another business (generally the smaller ones) which can be immersed within the parent organisation or run as a secondary. Many firms use this strategy to achieve strategic competitiveness in business as this proves to be the most effective tool for giving a reshape to firm’s competitive scope. Acquisition strategy also pave ways to enter newer markets by adding additional products while increasing distribution channels. This again brings gaining of core competencies’ by enabling more combinations. This strategy enhances shareholders values by reducing cost that are related to combined department and operations. By absorbing major competitor, market share increases while cross products or services are sold with much ease. This kind of strategy are utilised by those managers who recognises the need to transform corporate identity (Alam, Khan, & Zafar, 2014).

Integration difficulties: while making acquisitions, companies cannot exchange sensitive information’s with each other prior to be in common ownership. There are much legal and significant permissible permission to be worked upon to keep integration intact for both the companies that again ads to integration difficulties. These kinds of formalities can even take lot of time.

Inability to achieve synergies: Acquisition strategy may require lot of time and companies cannot decide upon which will be in charge for core decisions. The employees on the other hand lose morale due to which achieving synergies becomes difficult.

Inadequate evaluation of target: Organisations contemplating acquisition to often fail to pinpoint what are the core objectives for making itself attractive in front of other parties.   They also fail to provide adequate assessment of target as they are not sure about their attributes many times.

Too much diversification: Integrating two organisations is like sailing in one vessel through a storm. For this, efficient leadership is required or else in cases where culture and intense diversification is seen, problems can prove severe for both organisations. Trust, clarity, enthusiasm and energy among employees are risked during acquisitions.

Large or extraordinary debt: Companies during acquisitions may feel to overpay for blocking a competitive bid in order to protect their turf. While too much is paid, achieving satisfactory returns may not be realised (Pritchett,LP).

Managers overly focussed on acquisition: Company’s managers during acquisition phase are often seen getting engrossed in acquisition processes that they fail to recognise the core objective behind acquisition.  CEO often wants to prove other Managing Directors of their capabilities and thus is caught up in frenzy instead of realising how both the companies can complement each other.

Disadvantages of Related Diversification

Too large: Since acquisitions involve two separate entities, lack of clarity and disability to communicate at strategic levels arises many issues. The companies usually acquire comparatively smaller ones and handling big businesses difficult for smaller ones (Siegenthaler, 2010).

By taking a business to an international level, companies get access to larger base of consumers. By enhancing product or service quality, increased revenue from new customers can be observed. Globalising businesses have always made easier for the companies to get and access over desired raw materials and thus companies make international strategies for availing desired raw materials according to the requirements of customers. Since business process under international strategy performs operations in global marketplace, integrating core manoeuvre on global scale becomes possible while gaining an access to more talent. Company can hire talented people situated in global regions and even find more potentiality than home country. Another excellent incentive that influences firms to use international strategy is that new technologies can be integrated after making close study of global trends. Taking business to global marketplace can even enhance company’s reputation by giving customers products or services after gaining access to their demands. Although making international strategy is not an easy job, still the above mentioned incentives are capable enough to make managers use this strategy (Dynamic Language, 2014).

By implementing successful international strategy, companies achieve many benefits out of which few of them are identified in almost every company like location advantage, economies of scale and learning, and increased market size. Many businesses expand globally to diversify their assets to protect the company from bottom line or unforeseen events. With increased market size, offsetting growth in particular market will not affect the entire organisation. Introducing newer products and services in global marketplace helps in maintaining positive revenue system along with observing large scale economies. While spreading the business in diversified regions, meeting with fresh talent becomes probable that adds additional benefit to the company. Many companies choose international strategies to gain competitive advantage over others along with expanding business in different locations (Rossum, 2017).

International corporate level strategies are affected by environmental trends while making a choice of international strategy. In order to achieve success in business, they have to identify major environmental trends that can contribute business with financial stability, geographic diversification, product diversification and multiple industries. With the help of innovation and technology, many companies have been able to improve their business trends as compared to traditional processes.  Environmental factors relating technology and innovation have affected international business strategy to such an extent that they have to incorporate technologies in their operations. Dealing in geographically diversified regions had made communication process difficult within organisations along with making rapid communication with customers also becomes complicated. Therefore corporate companies’ needs to choose such areas where they can avail diversified cultural people so that handling environmental trend relating diversified regions becomes easier. Pricing becomes available in international market for which businesses lose pricing power especially during the period when the prices are set according to the marketplace. This factor again makes international companies consider environmental trend before making choice relating product diversification and competitiveness in the present market (Markgraf, 2018).

Two major risks involved while using international strategies are political and economic risks. While most of the businesses that perform operations in many countries have stable government, confronting instability in government has always been their priority concerns. Import and export licence, regulating laws and custom duties are always controlled by countries government which makes business operation more rigid. Fears of war and civil discordance have always affected international companies by upsetting overall GDP and market shares (Tiwari, 2017). Along with it, political demands and legal systems may nationalise assets and resources of the company that again adds to political risk. There are many economical issues affecting international strategies of companies while engaging onto operations in foreign markets. Economic instability is one of the major risks that affect business transactions by bringing in fluctuations in the value of country’s currencies. Lack of infrastructure and incompetent labour adds additional costs to business while affecting the overall wage rates. Enforcing property rights also becomes difficult in international business as engaging in overseas business, gaining practical solution about available resources becomes difficult (Metcalf, 2018).

References

Alam, A., Khan, S., & Zafar, F. (2014). STRATEGIC MANAGEMENT: MANAGING MERGERS & ACQUISITIONS. Retrieved from https://wireilla.com/management/ijbbr/papers/3114ijbbr01.pdf

Dynamic Language. (2014). What are seven benefits of Going Global? Retrieved from https://blog.dynamiclanguage.com/what-are-the-7-benefits-of-going-global

Effatdoost, E. C. (2013). DIVERSIFICATION STRATEGY, A WAY TOWARD THE COMPETITIVE ADVANTAGE. Retrieved from https://www.arabianjbmr.com/pdfs/KD_VOL_3_1/3.pdf

Markgraf, B. (2018). Major Trends in International Business. Retrieved from https://smallbusiness.chron.com/major-trends-international-business-60529.html

Metcalf, T. (2018). Political, Financial & Economic Risks in International Business. Retrieved from https://yourbusiness.azcentral.com/political-financial-economic-risks-international-business-17322.html

Pritchett,LP. (n.d.). How "Good" Deals Go Bad: The Most Common Causes of M&A Failures. Retrieved from https://www.mergerintegration.com/strategy-planning/common-causes-failures-deals-merger-acquisition

Rossum, J.-E. V. (2017). 5 benefits of international expansion. Retrieved from https://www.bizjournals.com/bizjournals/how-to/growth-strategies/2017/12/5-benefits-of-international-expansion.html

Santhanam, P. A. (n.d.). International Marketing Strategies For Global Competitiveness . Retrieved from https://pdfs.semanticscholar.org/ad48/7ed6dbc521bdfe062d8d2c49fe7f0ddce92e.pdf

Siegenthaler, P. J. (2010). Ten reasons mergers and acquisitions fail. Retrieved from https://www.telegraph.co.uk/finance/businessclub/7924100/Ten-reasons-mergers-and-acquisitions-fail.html

Tiwari, S. (2017). Global and International Strategies. Retrieved from https://www.anexas.net/Blog/Global-and-International-Strategies

Voice Marketing Inc. (2017). Related Diversification or Unrelated Diversification. Retrieved from https://www.more-for-small-business.com/related-diversification.html